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Why does criteria differ for scrap value of an asset?
I am not sure about the answers, but I think that these costs are capitalized and made part of the asset, because they are not immediate, I mean they will happen in20 or30 years.
I am talking regarding oil wells site because this is the duration of life of the wells.
scrap is destruction but decommisionning is site restoration => to make it nice
Please provide the right answer at the end , don't let me too curious:)
Because the decommisioning of the site is necessary to use the asset, while the scrap means that the asset is used and it is not better to exasurate its value after usage.
Very good question I would say you ask. First I would like you to read the para below veru carefully. I extracted this para from IAS16 PP&E.
An item of property, plant and equipment should initially be recorded at cost. [IAS16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS37 Provisions, Contingent Liabilities and Contingent Assets). [IAS16.16-17]
If you would focus onto this (Cost includes all costs necessary to bring the asset to working condition for its intended use) you will come to know that Dismantling cost is the cost that is necessary to bring the asset for it's intended use beacause it's usaully a condition attaching to the contruction of Plant or site etc so and if not compiled so the itself plant cannot be recognised beacuse it is not probable that the future economic benefits associated with the asset will flow to the entity.
While the scrap value is just an estimated value of asset that a company expects to be at the end of it's useful life, it can either be nil. The value is only deducted from the fair value of asset for the calculation of Depreciation.
For example, a vehicle that depreciates over5 years is purchased at a cost of $17,000, and will have a salvage value of $2000. Then this vehicle will depreciate at $3,000 per year, i.e. (17-2)/5 =3.
So at the end of year5 the book value will be $2000.
I hope this is going to be helpful and your feedback will be highly appreciating to me :)
don't know
its cuz decommitioning has to be done .that mean we have to incur extra chrges for decommtioning thats why value is added to asset while provision is made for the decommisioned value which is discounted value cuz of problem of time value of money involved in it.........
Sorry, I don't know Arabic Sir.
